Fitch Downgrades North Texas Tollway Auth's Revs to 'BBB+' & Withdraws Rtgs

NEW YORK--(BUSINESS WIRE)--Fitch Ratings has downgraded its rating on $1.3 billion in outstanding North Texas Tollway Authority (NTTA) Dallas North Tollway System revenue bonds to 'BBB+' from 'A-' and simultaneously withdraws them. All debt ratings for this issuer are also withdrawn at this time. Fitch will no longer provide rating coverage of the North Texas Tollway Authority.

The bonds were previously on Rating Watch Negative pending management's final financing structure for the take-out bonds, including the potential mix of additional parity system revenue bonds and subordinate lien debt, and structural protections to manage leverage. Fitch's downgrade reflects the financial profile and debt structure of the NTTA following its recent proposed offering of revenue bonds under an amended and restated trust agreement that begins a phased take-out of the $3.5 billion in bond anticipation notes issued in late 2007 to finance the acquisition payment for the State Highway 121 (SH 121) toll road project. Fitch's last discussion with management took place in November 2007 concerning the major components of this financing plan.

Fitch's downgrade of the outstanding debt to 'BBB+' takes into consideration the authority's financial profile, which includes $4.5-$5 billion in debt issuances in 2008 and another $1-$1.5 billion in debt over the next few years to support committed projects, and the low, 1.35 times (x) first-tier revenue bond toll rate covenant and additional bonds test that provide a limited margin of safety in a downside scenario. The downgrade also reflects the regional transportation mandate of the authority and its involvement in other projects currently in the planning and development phase in the metro-Dallas area, the likelihood that the authority will play a significant role in their development, and the potential for issuance of considerable additional system debt to support their completion. The use of heavily back-loaded, 50-year projected debt amortization and the use of long-term put bonds in the near term demonstrates a major change from the NTTA's past financial profile and a much higher dependence on future traffic growth and toll rate increases. This profile also reflects the authority's intention to pursue an aggressive regional agenda.

The financing for SH 121 represented a significant departure from NTTA's approach to project financing and delivery. It is expected that the NTTA's debt burden, which was estimated by Fitch to grow to about $2.5 billion in the near term will triple with near certainty to about $7.5 billion in the next few years. With the assumption of other projects, the debt load will increase further.

It is important to note that the strength of the existing system combined with the potential for new toll revenues from expansion projects provide considerable capacity to support this debt at investment grade levels. Fitch's rating reflects NTTA's strong operating performance supported by a large base of commuter traffic and an extensive and growing service area that facilitates increasing demand for NTTA's toll facilities. The combination of the authority's network of tolled highways that provide a competitive alternative to non-tolled facilities and growing traffic base provide NTTA with moderate to high economic rate-raising ability. Additional strengths include the NTTA's proactive financial management, which was recently demonstrated by its implementation of a programmed toll increase, and its positive track record in managing large-scale capital projects, including the opening of the Phase 3 extension of the Dallas North Tollway in September.

However, considerable risks do exist from this new investment, such as new project completion, forecasting, traffic ramp-up and growth, and operating and renewal and replacement costs. There is a dependence on modest growth well into the long term on the existing components of the system, which is reasonable, but there is a greater dependence over time on growth on the SH 121 project, such that it becomes a larger share of revenues toward the end of the forecasting window. Significant new revenues are assumed from video tolling surcharges, fines and interest income. While some of these revenues can reasonably be assumed with some certainty for a period of time, double-digit average annual growth over a 50-year window, such that these revenues exceed operating and maintenance (O&M) expenses, appears very optimistic. O&M expenses are assumed to grow at about a 2.75% steady-state rate for the life of the bonds, which also appears optimistic given historical rates of growth that have been in double-digits in recent years. The high historical rates of expense increase are in part due to the new sections of roadway entering operations. Regardless, the assumption going forward is even less than half the industry average of about 7% for Fitch-rated toll roads in the U.S.

On a standalone basis, the SH121 project's financial profile (revenues, expenses and debt) on a single lien would have non-investment grade credit characteristics. Under the NTTA, it would represent about two-thirds of the debt load of the NTTA in the near term and about 50% well into the medium term. The debt load and the high dependence on revenue growth assumptions 30 to 50 years out, low 2.75% expense growth assumptions for the length of the debt, and exposure to interest rate risk volatility indicate considerable downside risk in the financial forecast that can dilute projected coverage to a large extent. This could put some strain on the ability to fund major maintenance and rehabilitation on a cash basis.

Were these risks to be manifested, the thin layer of second-tier structural subordination provides very marginal credit enhancement to the first-tier debt. The authority's ability to meet its covenants and support new investment may necessitate toll rate increases above already approved levels, which may be challenging to implement now that increases have already been programmed way into the future.

The NTTA, which is a political subdivision of the State of Texas, was created in 1997 as the successor to the Texas Turnpike Authority and assumed ownership of the Dallas North Tollway System. NTTA's tollway system currently encompasses the Dallas North Tollway, the President George Bush Turnpike, the Addison Airport Toll Tunnel, the Mountain Creek Lake Bridge, and the State Highway 121 project.

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